Policy Note 14: End the additional burden on households due to cold progression

Inflation causes wages to rise in nominal terms and has an impact on public and private demand, income distribution and the composition and scope of public budgets. The effects of inflation on wage and income tax are particularly significant. In 2015, for example, inflation-related additional revenue amounted to around EUR 3 billion or 1% of GDP compared to 2009. "Cold progression leads to a considerable additional burden on households," says Tobias Thomas, head of the economic research institute EcoAustria.

"The best way to avoid the additional burden on households due to cold progression is to index the tax rate and make automatic annual adjustments," explains Thomas. The entire wage increase - including productivity-induced increases - should be taken into account in the rate index. "The entire rate should also be adjusted and not just individual tax brackets," says Thomas. Politically desired changes to the redistribution policy could continue to take place in the process of democratically legitimized decision-making, concludes an EcoAustria policy note published today.